William von Mueffling may have turned his back on hedge funds, but his former lieutenant at Cantillon Capital Management, Ben Guest, argues that the discipline of managing them adds a vital edge to his search for opportunities.

In the first half of this year, the firm’s Santa Ana long/short fund has achieved a 60% return against 24% from the Nex clean technology index. The fund has lost 11.1% since its launch in September 2007, but that compares to a 42% fall in the Nex.

Guest’s long-only accounts are down 14% since launch in May 2008, against a 45% fall by the Nex. Socially responsible funds offered by peers have fallen, on average, by 26% over the period. Virgin’s climate change fund is down 47%.

Virgin’s sub adviser, GLG Partners, argues that it will eventually pay to invest in companies that clean up their environmental act. But Guest argues that top returns can only come from backing quality cleantech stocks, while shorting those that are expensive and least efficient.

Guest said: “I am an engineer by training. I believe in the importance of technology, but also the ability to apply and update it.”

He has a healthy respect for the willingness of governments to subsidise clean energy, as an alternative to fossil fuels, which are in finite supply and exacerbate climate change. To gain momentum, he has hired veteran marketer Christian Yates, who used to work at Bear Stearns and Julius Baer.

He said: “The best opportunities will always come from countries and sectors that have enjoyed state support. It doesn’t matter whether you are talking about the internet, defence or cleantech. The effect is the same. It is no coincidence that countries that invest the most public funds – Japan, Germany, China, the US – throw up the best companies.”

His Lux Energy private equity firm has negotiated deals in Spain that promise returns of 12%, using 43% leverage. Guest is pleased to be running his own show, after years of contributing to the efforts of others at Lazard Asset Management and Cantillon.

At Lazard, he was head of technology, and put in charge of a technology hedge fund in November 2000. He said: “It wasn’t a stupid idea. There were lots of shorting opportunities. We did 24% in our first year, 12% in the second, then left.”

Von Mueffling was infuriated when Bruce Wasserstein took control of the bank and refused to cede equity to important operators. When von Mueffling left in 2003 to set up Cantillon, Guest was happy to travel with him to set up a technology fund and supply research across the firm.

Guest is glad von Mueffling gave him the opportunity. Guest adds that he believed von Mueffling was generous with bonuses, but believed he was reluctant to give equity away. Guest said that he became weary of supplying mid-cap ideas to Cantillon’s funds.

He added he became frustrated because he believed von Mueffling was too dismissive of cleantech.
Guest’s technology fund hit $1bn, but shut down and returned money to clients when Guest decided to quit.

He admits to being nervous when he rang von Mueffling to tell him the news: “He said he understood, then he rushed off the phone, saying he would have to decide what to do next.”

Guest has never been a fan of the investment banking “eat-what-you-kill” approach, where big bonuses are relied on to reward individual performance.

He said: “I prefer to spread equity across Hazel.” He was quick to hire Kevin Sara from Nomura, to head venture capital, and Bozkurt Aydinoglu, co-founder of data provider New Energy Finance, to co-manage the hedge fund.

Given that sellside clean technology research is in short supply, Guest reckons managers need input from the unquoted and state sectors to understand the companies worth backing – which is where his private equity exposure comes in.

One of Guest’s favourite companies is Suntech Power of China: “It can produce solar cells at an incredibly low cost. It recently came up with a variant cell which raises the conversion rate from solar rays from 15% to 18%. This looks small, until you realise that is a 20% advance in terms of output.”

Guest reckons the cost of solar energy is set to halve, offering a large rise in returns for alternative energy, which tends to enjoy generous state subsidies. Nearly one third of his portfolio is invested in solar energy.

He said: “Governments know we are facing an energy crisis. We will need to increase clean energy production from 0.3% to 10% of the total in less than 20 years. It’s a fantastic opportunity.”